Top Sales Tax Questions & Answers for Foreign Businesses Selling Into the US

The United States has possibly the world’s most complex sales tax regime. This is due to each state setting its own sales tax rules, and states often take widely varying approaches. As a result, each state has a different tax framework, with varying rules around everything from tax liability and tax rates to exemption categories and reporting requirements. On top of this, some local area tax jurisdictions also have powers over some aspects of taxation and can set different rules for their city or county.

As a business based outside of the US you may think you have no obligations to sales tax, especially if you have no offices or employees within the continental US, but that doesn’t mean you don’t have a US sales tax obligation. For the US, a sales tax obligation can be created in multiple ways, one of which involves no physical location or person but instead sales made into the country.

Could you have a US sales tax obligation and not realize it? This blog will be your guide with key US sales tax questions and answers:

What is Nexus?

Sales and use tax nexus is a connection between a person or entity and a US taxing jurisdiction.  Sales tax nexus is the basis for all your sales tax decisions because without sales tax nexus you have no further obligation to a state.  If you do have sales tax nexus, then you need to dig a bit deeper.  But what exactly defines when you have sales tax nexus?

From a US sales tax perspective, it is either a physical or economic presence.  As a business headquartered outside of the United States, you may need to focus more on economic nexus, but it is good to understand what creates a physical presence as it is more than just an office location. Many businesses get tripped up in thinking they only need to worry about an economic presence and later find out they do in fact have a physical presence without employees or an office within a state.

There are some obvious examples of physical presence including an office or an employee in a state.  However, don’t be fooled by the lack of this true physical presence.  States can also assert sales tax nexus if you travel into their state, exhibit at trade shows, or use independent contractors to solicit business or provide some type of service to your end customer.

Consider these common business activities that can create physical tax nexus:

• Employees or offices
• Sales reps or agents
• Delivery vehicles
• Maintenance and repair services
• Trade shows
• Inventory (this can include where Amazon houses your inventory as well)

How do I determine if I’ve established economic nexus?

The second category of sales tax nexus came into effect in 2018 and is referred to as economic nexus.  The South Dakota vs Wayfair, Inc. court case led to the largest change in US sales tax in over 50 years, redefining nexus as not only a physical presence but also as a certain amount of sales and/or a certain number of transactions in a state or jurisdiction.  This is now referred to as economic nexus. All states with a state-wide sales tax have adopted some form of economic nexus that requires an out-of-state business to collect and remit sales tax. These obligations potentially affect many industries and may mean that a company does not have any physical presence but if their sales revenue and/or number of sales transactions exceeds a certain threshold over a one-year period of time, then the state will assert sales tax nexus and require the business to collect the applicable sales tax.  These economic nexus standards are frequently changing and evolving and can be quite a pain to keep up with.

There are only two aspects of business activities used to assess whether businesses have economic nexus in a state:  

1. Sales revenue value – this can be thought of as invoiced revenue and not recognized revenue 

1. Number of transactions (if you operate a subscription model, note that every renewal counts as a transaction) - transactions can also be considered invoices 

Some states use just one of these measures; others use a combination. There is some consistency between states as to the level of revenue and/or the number of transactions at which nexus is created. A good rule of thumb is $100,000 in revenue or 200 transactions. However, this is not accurate for all states, but it is what South Dakota originally enacted, and for many states has stuck.

Are economic nexus thresholds based on retail sales or my full gross sales into a state or jurisdiction?  

It depends. A further complication of economic nexus is that individual states can potentially use three different revenue figures and periods for calculating sales revenue value. 

Revenue figures can refer to: 

• Gross sales revenue – all sales including tax-exempt sales and exclusions. 
• Retail sales revenue – any sale other than a sale for resale. 
• Taxable sales revenue – only taxable sales, with tax-exempt or excluded tax sales not counted.

The period for calculations can be:

• Previous 12 months 
• Current calendar year 
• Previous calendar year

Where can I find what the economic nexus thresholds are for the US? There are many resources, including looking at each individual state site, but you can also review TaxConnex’s economic nexus map.

Do all US states have a sales tax?

No. There are 5 states that do not have a state-wide sales tax, they are considered the NOMAD states.  New Hampshire, Oregon, Montana, Alaska, and Delaware. Sales within these states do not need to be considered for sales and use tax purposes.

Alaska must be handled a little differently than the others though,  as over four years ago, local jurisdictions there formed the Alaska Remote Seller Sales Tax Commission to streamline sales tax collection and remittance.

So If I have nexus, I automatically have a US sales tax obligation?

No, first you must determine if your products and/or services are taxable in the states and jurisdictions in which you’ve established nexus.

Taxability refers to whether sales tax applies to your sales or not.  Generally speaking, tangible personal property is taxable and services are exempt – unless otherwise stated.  The “unless otherwise stated” is a critical disclaimer.  For example, certain products used in the medical field can be viewed as tangible personal property but are not taxable due to the type of product – there are many exemptions associated with the medical profession.  Likewise, telecommunications “service” is one of the most heavily taxed services in a lot of states.  Taxability can be confusing with software as well - is Software-as-a-Service taxable?  It sounds like a “service” but by early 2019 more than a third of states were taxing SaaS delivered software. (Some have since stopped.) If you are a SaaS business, check out our SaaS map to determine where your solutions may be taxable.

Similar to nexus, laws are different across states for taxability. Where companies get into trouble is applying taxability rules from one state to another states as they grow. You can review the statutes yourself; however, sometimes statutes require interpretation, and a sales tax professional can help you draw the right conclusions.

Taxability rules related to other digital goods and services vary from state to state as well.  Part of the complication in conducting business in the US is the variability of rules from state to state.  You can think of each state as a separate country – setting its own rules and laws.

Where do I go if I need help figuring all this out?  

TaxConnex offers sales and use tax consulting and compliance outsourcing services. We’d love to help you understand where you have a US sales tax obligation and how to get started. Get in touch!